With Defaults Rising, Xinhua Offers Advice on Avoiding Credit Risk

Xinhua: 树立风险自担理念 重视债券违约回收

Identify and prevent credit risks

For investors, it is necessary to focus on the following five aspects in the near future in order to better identify and prevent credit risks and reduce losses:

The first is to monitor the operation and cash flow status of private enterprises in low-credit rating and high-risk industries. Judging from the number of defaulting entities and the average default rate, private enterprises are the highest among all types of enterprises. The main reason is that private enterprises are weaker than state-owned enterprises in terms of their ability to withstand macroeconomic fluctuations, downturns in business climate, and policy uncertainty. At the same time, corporate governance and poor business operations are also important causes of eventual defaults. For example, the issuer’s extensive expansion and excessive borrowing lead to short-term profitability, while rigid debt continues to grow and financing flexibility declines, which can easily lead to the disruption of the capital chain and debt repayment. The ability to drop quickly.

The second is to focus on enterprises with weak competitiveness in the coal, real estate, trade and chemical industries. The structural reforms on the supply side have further promoted the concentration of surplus coal, steel and other overcapacity industries. Some companies with small production capacities and high production costs have been accelerated to clear away, and credit risks will be further divided.

The third is to pay attention to the credit risk of urban investment enterprises. With the gradual normalization of defaults and the gradual strengthening of local government debt risk management, the credit correlation between urban investment enterprises and local governments has continued to weaken, capital investment channels of urban investment enterprises have narrowed, financing and transformation pressures have increased, and credit risks have increased. There will be a rise in the credit risk of urban investment companies that are relatively backward in regional economic development, have encountered obstacles in their transition, have short-term liquidity, or have large debt risks.

The fourth issue is to pay attention to the issue of bond default recovery. At present, the overall recovery rate of China's public bond market is not high, and the process of disposal and recovery of bonds after default is slow. In the context of the increasingly normalization of default, investors should pay more attention to the disposal and recovery of bonds after default. They should study the bond default disposal methods and the factors affecting the bond default recovery rate, and strengthen risk prevention.

The fifth is to strengthen the international perspective. In recent years, the opening up of China’s bond market has been accelerating. Investors should strengthen their international perspective, establish their awareness of sovereign risk, and gradually establish a global vision of a credit risk identification, assessment, and investment standard system that incorporates China’s national debt and local government debt into global credit. In the risk assessment system, credit risk assessments for Panda bonds and foreign bonds were strengthened.

The article was written by analysts from Lianhe Credit Rating.